Is it the Right Time to Buy the US Stocks?

EVERY time the market suffers another steep drop, it’s tempting to think that stock prices may have come down so much that the elusive market bottom is finally in sight.

Prices have certainly come down. On Friday, the Standard & Poor’s 500-stock index was 44 percent below its peak of a little more than a year ago. Since then, the price/earnings ratio on the S.& P. has dropped from 16.8 all the way down to 12. With numbers this low, is the sell-off nearing an end?

It’s certainly possible, and some canny investors have begun nibbling at stocks. But don’t count on being able to time the market.

While cheap stock prices are always a welcome development for bargain-seeking investors, low P/E ratios haven’t always been an accurate gauge of predicting turnarounds in the market.

If they were, stocks would have surged sharply in the mid to late ’70s, when the market’s P/E ratio sank into single digits. Instead, the S.& P. was pretty much flat throughout that time.

“Cheap valuations are simply a symptom of what’s wrong, not the catalyst to get the market out,” said Richard Bernstein, chief investment strategist at Merrill Lynch. After all, just because stocks are trading at extremely low levels today, it doesn’t mean they can’t become even cheaper tomorrow.

To be sure, investors may be hopeful now that some respected investors — including Warren E. Buffett, chief executive of Berkshire Hathaway, and Jeremy Grantham, a chairman of the investment management firm GMO — say they’ve begun to selectively buy stocks.

But both have gone to painstaking lengths to stress that they weren’t predicting that the worst of the sell-off was over.

In an Op-Ed article in The New York Times, Mr. Buffett wrote: “I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now.”

Similarly, Mr. Grantham said in an interview that even though his firm began buying stocks in early October, after prices fell to attractive levels, the market had a tendency to “overshoot” during sell-offs. “Market bottoms have this Murphy’s Law style of being much lower than you ever expected in your worst nightmare,” he said.

Mr. Grantham adds that he thinks the odds are roughly two to one that stock prices will sink to new lows next year. If the economy is in a modest recession, Mr. Grantham thinks the S.& P. could fall from its current level of around 870 down to 800. But if the recession turns out to be a severe one, “the S.& P. could fall to a range that’s closer to 600 than 800,” he said.

If that’s the case, why did GMO begin to buy stocks in this market? Because Mr. Grantham doesn’t believe in trying to time short-term market moves.

Mr. Grantham noted that GMO began buying only after its portfolios had fallen below some key thresholds. For example, in GMO’s global balanced portfolio of stocks and bonds, the firm’s minimum allocation to equities is usually 45 percent. But after the market sell-off, that equity allocation dipped to around 38 percent. So once stock prices began to look attractive, GMO started rebalancing back into what it regards as the most undervalued types of equities: emerging markets stocks and high-quality domestic blue chip shares. After a few rounds of purchases, stocks now make up around 55 percent of GMO’s global balanced portfolio.

Mr. Grantham says that although he doesn’t know how well he timed his purchases, “we do know that seven years out, these will be good purchases for us.”

But what if you are determined to be opportunistic? How can you tell if the market is poised to rebound anytime soon — or at least sooner than seven years?

There is no sure-fire answer. But one way is to pay close attention to the asset allocation recommendations of Wall Street strategists. “It turns out to be a tremendous contrarian signal” for spotting market trends, said Mr. Bernstein.

For more than two decades, Mr. Bernstein has tracked recommended equity allocations in balanced portfolios managed by Wall Street firms. He found that when the consensus recommendation for stocks exceeds 60 to 65 percent of a balanced portfolio — as was the case between 2000 and 2004 — it tends to be a bearish indicator for future stock performance. On the other hand, when market strategists recommend keeping only around half of your portfolio in stocks, as was the case in 1997, it tends to be a bullish sign.

In addition to investor sentiment, it’s also worth keeping tabs on the sentiment of another group of Wall Street pros: the analysts who follow individual companies.

In recent weeks, these analysts have begun to lower their forecasts for 2009 earnings. Mr. Bernstein notes that for the first time in seven years, the ratio of upward earnings revisions to downward revisions has fallen to 0.5 — meaning that for every corporate earnings forecast that has grown more positive, two have become more pessimistic. “Analysts may be finally appreciating that the financial crisis has turned into a full-blown economic crisis,” he said.

Still, analysts are far from throwing in the towel on their earnings forecasts, which may be needed for the market to start to rally.

While profit projections have declined, they may still be way too bullish. According to a survey of analysts by Thomson Financial, earnings growth estimates for S.& P. 500 companies in 2009 have fallen well below the rosy 22 percent forecast at the start of October. Still, they’re expecting corporate profits to grow more than 12 percent next year. Since many are predicting a difficult first half of the year, thanks to the weakening economy, this would assume a tremendous profit surge in the latter half of 2009.

Christopher N. Orndorff, head of equity strategy at Payden & Rygel, an asset manager based in Los Angeles, predicts that “the earnings releases in January are going to be poor.” That should drive down earnings forecasts for 2009 even lower, he said.

If earnings forecasts begin to fall substantially, he said, “it will be very difficult for stocks to rally.”

By PAUL J. LIM

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Will Warren Buffett Rescue American Express? (AXP)

Barrons had an interesting piece on American Express (AXP) today, suggesting Warren Buffett may come to the aid of the credit card company.

Warren Buffett and American Express have a long relationship and a deep one as well, with Buffett’s Berkshire Hathaway owning about 13% of the company already. The thought is that Mr. Buffett may be willing to invest more dollars into the company or potentially use stock to acquire the company outright. That would not be the norm, as Berkshire Hathaway prefers using cash in its transactions.

We have been following the follies of American Express, and have continued to warn investors that the company made some badly-timed decisions that has put the franchise in a tough position. Management’s timing to expand the credit card portfolio in 2004 put the wheels in motion on the huge credit card losses the company is now dealing with.

The Bottom LineMr. Buffett will likely demand terms similar to his Goldman Sachs (GS) deal, but that is if he feels the bet should be made. With all the deteriorating financials out there, and Berkshire themselves coming off a disappointing quarter, the timing of any American Express deal may be far off and perhaps unlikely. One thing we do know is that there are no signs that the company will be turning around anytime soon, so investors may need to put this name on the shelf until the spending slowdown and the credit card loan defaults trends improve. The company has a dividend yield of 3.60%, based on Friday’s closing stock price of $19.99.


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Memo to Warren: AmEx Preferred at 15%, Warrants at $12

Barron's is suggesting that Warren Buffett might come to the rescue of American Express (AXP). Since Berkshire Hathaway (BRK.A) already owns 13% of the troubled credit card issuer, a rescue might make sense. If, that is, Mr. Buffett can price his entry in line with the new reality governing yields and valuations.

On Monday, Fed officials announced that an application to transform American Express into a bank holding company had been approved. Two days later, the company confirmed that it was seeking $3.8 billion in government aid. But that is only part of the story. Besides needing $4 billion from the commercial paper market, American Express must raise nearly $7 billion in longer-dated debt within six months, and another $15 billion within the next year. Quite clearly, Chief Executive Ken Chenault’s strategic decision to rapidly expand the domestic credit card portfolio from $38 billion, in 2004, to $70 billion failed to incorporate the prospects of a serious economic downturn.

American Express shares are down 60%-plus so far this year. So the challenge facing Warren Buffett, or any other investor with deep pockets, is to determine whether (a) the inevitable increase in credit card delinquency rates, domestically and globally, has been factored in at current price levels and (b) the 10% yield on Goldman Sachs (GS) and General Electric (GE) preferred stock investments adequately reflects the reality in this instance, on a company-specific and comparative basis, of today’s fluid bond pricing environment.

If American Express and Berkshire Hathaway longer-dated CDS spread trends are any guide, Mr. Buffett should provide around 850 basis points for default risk alone. Then, given the nature of the yield curve, a more prudent fixed rate benchmark is about 5%. After adding execution costs, a rationally priced preferred should yield 15%.

Of course, as Barron's pointed out, the 5% preferred-with-warrants proposition from the Treasury appears, at first glance, to be a decidedly better alternative for American Express, particularly when the credit card company could also access the FDIC guarantee programme for near-term and medium-term debt issues. But the finer print of the FDIC’s Interim Rule has received serious objections relating to fees, maturity restrictions, guarantee quality and even capital adequacy guidelines. When, if and at what cost the FDIC programme begins is still an open question. In the interim, there is certainly room for Berkshire Hathaway to increase its stake in American Express.

Which brings us to the task of establishing a strike price for the warrants. When Moody’s cut its rating on American Express last month, from “A2” from “A1”, it placed the company on negative watch. And for good reason. Moody’s statement warned that since American Express derived much of its income from fees, as opposed to interest from revolving credit balances though “its lending exposures have increased significantly over time.” Note the important shift in key value drivers.

The statement went to on to point out that “with this shift, eroding economic conditions across the US will likely pose a higher burden on Amex’s asset quality and profitability. In its latest disclosure documents, Citigroup (C) conceded that it is virtually impossible, at this point in time, to assess how the fate of the global economy will influence the quantum of credit card default provisions required during 2009. Note the uncertainty.

This writer’s bearishness on American Express shares (Friday close: $19.90) is firmly rooted in the belief that unless Washington can resolve the crisis in jobs (including job quality) and housing on a high-priority basis, consumer delinquencies must rise exponentially in forthcoming weeks and months. Believe the optimists, who invariably talk of 5-year and 10-year time horizons, if you must. For the record, if this is any comfort to AXP bulls, Barron's is of the view that the market is presently over-reacting, and that American Express has ample liquidity to ride out whatever tough economic conditions lie ahead.


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Warren Buffett: Why I’m Buying U.S. Stocks Now

Warren Buffett wants the world to know that it’s time to get greedy right now, as fear sends stock prices plunging across the globe.

Using the widely-read opinion pages of The New York Times, Buffett writes that he’s been buying U.S. stocks for his personal account, picking up a “slice of America’s future at a marked-down price.”

READ WARREN BUFFETT’S NEW YORK TIMES OPINION PIECE

Besides his Berkshire Hathaway shares, Buffett reveals that he used to own nothing but U.S. bonds. Now, he writes, “If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent” in American stocks. (Remember, he’s talking about his own holdings, not the billions of dollars of stock owned by Berkshire Hathaway itself.)

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”


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So How Does Warren Buffett Find Low-Priced Value?

Here we look at some of the questions that Buffett asks himself when he evaluates the relationship between a stock's level of excellence and its price. Keep in mind that these are not the only things that he analyzes:

1. Has the company consistently performed well?

Sometimes ROE is referred to as "stockholder's return on investment." It tells the rate at which shareholders are earning income on their shares. Warren Buffet always looks at the return on equity (ROE) to see whether or not a company has consistently performed well in comparison to other companies within the same industry. ROE is calculated as follows:


= Net Income
Shareholder's Equity

Just having a high ROE last year isn't enough. The investor should view the ROE from the past five to ten years to get a good idea of the historical growth.

2. Has the company avoided excess debt?

The debt/equity ratio is another key characteristic that Warren Buffett carefully considers. Buffett prefers to see a very small amount of debt, which means earnings growth is being generated from shareholders' equity. The debt/equity ratio is calculated as follows:

=Total Liabilities
Shareholders' Equity

This ratio indicates the proportion of equity and debt the company is using to finance its assets, and the higher the ratio, the more debt--rather than equity--is financing the company. A high level of debt compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities.

3. Are profit margins high? Are they increasing?

The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin. This margin is calculated by dividing net income by net sales. To get a good indication of historical profit margins, investors should look back at least five years. A high profit margin indicates that the company is executing its business well, but increasing margins means that management has been extremely efficient and successful at controlling expenses.

4. How long has the company been public?

Buffett typically considers only companies that have been around for at least ten years. As a result most of the technology companies that have had their IPOs in the past decade wouldn't get on Mr. Buffett's radar. It makes sense that one of Buffet's criteria is longevity: value investing means looking at companies that have stood the test of time but are currently undervalued. Never underestimate the value of historical performance, which demonstrates the company's ability (or inability) to increase shareholder earnings. Do keep in mind, however, that the past performance of a stock does not guarantee future performance--the job of the value investor is to determine how well we can trust that the company has a capacity to perform as well as it did in the past.

5. Do the company's products rely on a commodity?

Initially you might think of this as a radical approach to narrowing down a company, but Buffett tends to shy away (but not always) from companies whose products are indistinguishable from competitors, and those that rely solely on a commodity such as oil and gas. He does not put his money into companies that rely on the price of an underlying commodity. If the company does not offer anything different than another firm within the same industry, be wary as a value investor.


6. Is the stock selling at a 25 percent discount to its real value?

6. Is the stock selling at a 25 percent discount to its real value?

This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the key for value investing, and finding a company that is trading at a 25 percent discount is not always easy. To check this, we must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues, and assets. A company's intrinsic value is usually higher than its liquidation value, which is what a company would be worth if it were broken up and sold today--the liquidation value doesn't include intangibles such as the value of a brand name, which is not directly stated on the financial statements.

Once Buffett determines this intrinsic value of the company as a whole, he compares it to its current market capitalization, which is the current total worth (price) of the entire company. If his measurement of intrinsic value is at least 25 percent higher than the company's market capitalization, Warren Buffet sees the company as one that has value. Sounds easy, doesn't it? Well, Buffett's success, however, depends on his unmatched skill in accurately determining this intrinsic value. While we can outline some of his criteria, we certainly have no way of knowing exactly how he gained such precise mastery over calculating value.

Conclusion

Well, as you have probably noticed, Warren Buffett's investing style, like the shopping style of the bargain hunter, reflects a practical, down-to-earth attitude. This attitude Buffett maintains toward also his lifestyle and overall philosophy on life: he doesn't live in a huge house, he doesn't collect cars, and he doesn't take a limousine to work. The value-investing style is not without its critics, but whether you support Buffett or not, the proof is in the pudding. As of 2003, he holds the title of the second richest man in the world, with a net worth of over $30 billion (Forbes 2003). If you choose to practice this kind of investing style, keep in mind that it takes time to do the proper analysis and to get good at it.

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What is the Buffett Investing Philosophy?

Value investing looks for stocks whose prices are low for their companies' supposed intrinsic worth, which is determined by an analysis of certain characteristics and fundamentals of companies. Mirroring the mentality and shopping style of a bargain hunter, value investors looks for products that are beneficial and high quality but cheap in price. In other words, the value investor searches for stocks that he or she believes are undervalued by the market. Like the bargain hunter, the value investor tries to find those items that are valuable but not quite recognized as such by the majority of other buyers.

Warren Buffett takes this value investing approach to another level. Many value investors aren't supporters of the Efficient Market Hypothesis but trust that the market will eventually properly start to favor those quality stocks that were, for a time, undervalued. Buffett, however, doesn't think in these terms. He isn't concerned with the supply and demand intricacies of the stock market. In fact, he is not really concerned with the activities of the stock market at all. He chooses stocks solely on the basis of their overall potential as companies--he looks at each company as a whole. Holding these stocks for the extended long term, Warren Buffett seeks not capital gain but ownership in quality companies that are highly capable of generating earnings. When Warren Buffett invests in a company, he is not concerned whether the market will eventually recognize the company's worth; he is concerned with how well that company can make money as a business.


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Buy It Like Warren Buffett

It took him long enough.

At the end of 2004, Warren Buffett's Berkshire Hathaway had around $44 billion in cash. Ditto for 2005. And 2006. And, yes, 2007 as well.

At one point, more than 20% of Berkshire's assets were earning money market returns. While armchair investors complained that the company had amassed too much capital to continue its market-thrashing ways, Buffett simply sat on Berkshire's enormous pile of cash. And waited. And waited. And waited some more.

He refused to buy until the time was right.

The time is right
Buffett has called the current mess an "economic Pearl Harbor." He has also said, "In my adult lifetime, I don't think I've ever seen people as fearful economically as they are now."

These aren't just words. Mr. Greedy-When-Others-Are-Fearful has been stuffing money where his mouth is.

That $44 billion Berkshire had at the beginning of this year? By the end of June, Buffett had spent it down to $31 billion, in deals including Berkshire's purchase of Marmon Holdings, the Mars purchase of Wrigley, and the Dow Chemical takeover of Rohm & Haas. He even bought up auction-rate securities at bargain prices.

And lately, he's been accelerating. It's nice to have cash when the credit markets are frozen.

This fall, he has committed:

$4.7 billion to purchase Constellation Energy for $26.50 per share. (It had been trading above $100 at the beginning of the year.)

$5 billion to purchase perpetual preferred stock in Goldman Sachs. He not only gets the hefty 10% dividend, but also receives warrants allowing him to buy $5 billion of common stock at $115 per share.

$3 billion to General Electric under terms similar to the Goldman Sachs deal -- except the preferred stock is callable for a 10% premium after three years. The warrants allow him to buy stock at $22.25 per share.

That's more than $20 billion spent over just one month if he chooses to exercise those warrants. Buffett's back, baby!

Buffett's buying. Should you?
Historically, average investors could simply ride Buffett's coattails to huge returns (think double the market's returns). But this time is different.

Buffett got sweetheart deals on both Goldman and GE. In the case of GE, he's earning 10% dividends on a company rated AAA -- and if he buys the warrants and they pan out, he'll earn even more.

When Buffett made these deals, he was providing much more than just capital. He was lending his credibility. That meant Goldman and GE were willing to give him great deals, in the hopes that his name alone would stabilize their stock prices for follow-on offerings.

In other words, don't buy into Goldman or General Electric just because Buffett has.

Learning from Buffett
Instead of buying what Buffett is buying, we should look to what his strategy has to teach us. So what can we learn from Buffett's shopping spree? Two things:

Invest for a lifetime.

Compile a watch list of attractive companies.

Buffett's pushing 80, but he hasn't been panicking and trying to make a quick buck, no matter what the market has done. Rather, he's been investing for the long term. In the past few years, that's meant waiting for opportunities to present themselves. Now that they are, he's striking with a vengeance.

And because of his patience, he hasn't had to compromise -- and he's getting great companies at great prices. When Constellation Energy's price dropped so precipitously in mid-September (from above $60 to the $20s), he was ready to pounce. Goldman and GE may have approached him, but you can be darn sure that he'd already done the bulk of his research beforehand.

Follow Buffett's lead
To be great investors, we need to be similarly prepared. In volatile times like these, Mr. Market presents us with loads of great values -- but just because a stock price has fallen, that doesn't mean a given company is a good value.

To wit: Here's a screen of companies that are trading at less than 50% of their 52-week highs, and are still above a market capitalization of $5 billion.

You've probably heard of most of these companies, and find their discounts tantalizing. A lot more great companies sell for half off in this market, too. How should you proceed?

One prudent way to take emotion out of the equation: Compile a list of companies you'd love to own for the long term, and the prices you'd love to pay for them. When one of your favorite companies goes on sale, you can revisit your list, ensure your investing thesis is still intact, and bend it like Buffett.


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AmEx has plenty of cash to weather this crisis. A misunderstood stock.

THE CREDIT CRISIS AND THE DEEPENING RECESSION have dealt a double blow to American Express , which has long been viewed as one of the globe's leading financial companies, due to its enviable card business and consistently high returns.

AmEx shares are off 61% this year to 20 -- back where they stood in 1997 -- and much of the drop has come since mid-September, when the stock traded at 40. Wall Street worries about the company's reliance on credit-markets funding, rising losses on its credit-card loan portfolio and weakening consumer spending worldwide.

These concerns are legitimate, but the market may have overreacted because AmEx should have enough liquidity even if credit-market conditions remain tough in 2009. The company is likely to be solidly profitable next year, even if losses spike on its $75 billion credit-card loan portfolio.

It helps that AmEx's biggest fan is Warren Buffett, whose Berkshire Hathaway is its largest stockholder with 151 million, or 13%, of the company's shares. The combination of AmEx's attractive franchise and Berkshire's stake suggests the company's stock may be near a bottom.

AmEx hasn't needed to turn to Berkshire for help because it's well capitalized compared with most major banks and brokerages, and may avail itself of various government-liquidity facilities to meet maturing debt. AmEx recently got approval to become a bank-holding company, and it is possible AmEx could merge with a bank in the next year to more quickly achieve its goal of getting a significant share of its funding from deposits.

AMEX ALSO REPORTEDLY has sought about $3.5 billion of capital under the Treasury's TARP program. That capital -- 5% preferred stock with warrants -- is more attractive to AmEx than the terms Buffett would exact.

Buffett couldn't be reached for comment -- and he rarely talks about potential investments -- but our sense is he'd probably pump in several billion dollars in new capital if needed. Berkshire also might be willing to buy the whole company if AmEx's financial condition unexpectedly deteriorates. AmEx's market value has shrunk to $23 billion, making it easily digestible for Berkshire, even assuming Buffett pays a premium. Berkshire's market value is $155 billion. Buffett usually likes paying cash for businesses, but he might be willing to make an exception and issue Berkshire equity in the case of AmEx.

Buffett knows and loves AmEx, having first invested in the stock during the 1960s. Its appeal lies in a business model based on generating fee income from consumer and business spending on American Express cards, rather than profits from a credit-card loan portfolio. More than half of AmEx's annual revenue comes from the fee charged to merchants -- now averaging about 2.5% -- on purchases made with American Express cards. Spending on the cards worldwide should top $700 billion this year, up from $647 billion in 2007.

Looking out a year, the stock could hit 30 if the company navigates the credit crisis and looks on track to earn in 2010 anything close to its target of a 30%-plus return on equity. That would imply profits of over $3 a share; it's earned a 27% return on equity so far this year.
NEXT YEAR'S PROFITS are apt to fall, along with those of most big financial companies. The Wall Street consensus for '09 of $2.50 a share seems high. We're assuming $2 a share, down from an estimated $2.59 a share this year.

Even under the gloomy scenario of Barclays Capital analyst Bruce Harting, AmEx will remain in the black next year. He cut his '09 estimate last week to $1.60 from $2.25 a share. Harting assumes that charge-offs on AmEx's domestic card-loan portfolio average 9.2% in 2009, up from 5.9% in the third quarter and 3% a year ago. He also assumes domestic spending on American Express cards falls 5% in 2009, compared with a 7% increase in the first three quarters of 2008.
AmEx CEO Ken Chenault is considered among the best financial-services executives, but he erred in rapidly expanding the U.S. credit-card portfolio in recent years to $64 billion from $38 billion in 2004. AmEx's credit-card loan losses are rising. The loss rate on AmEx's charge-card portfolio remains low at just 0.33%.

"This company can weather a huge hurricane and come out fine," says Vitaliy Katsenelson, head of research at Investment Management Associates in Denver. "American Express is one the simplest financial companies to analyze. It's much more transparent than Citigroup or JPMorgan or Goldman Sachs."

He argues that the government safety net removes a key risk with AmEx: funding. AmEx has relied on commercial paper and on securitization of credit-card loans, two markets that are difficult now to access. AmEx says it's comfortable about its ability to refinance some $24 billion in debt maturing in the next year.

The company's ratio of tangible common equity to what it calls "managed" assets of $156 billion -- which include credit-card loans financed with debt and securitizations -- is 6%, versus 4% for Goldman Sachs.

It's understandable that investors shun AmEx because of the company's exposure to the credit markets and the consumer. While next year is likely to be difficult, the company should come through in good shape. And if things get really tough, Chenault probably can pick up the phone and find a willing listener in Omaha.


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Journey to the Center of Warren Buffett’s Mind

Not so long ago, investing used to be fun. Now it resembles an Olympic archery practice at which the target is you. Maybe you felt a little safer this Thursday, when the Dow went up 553 points. Well, today it dipped by as much as 352 before closing down 338 points.

If you want to escape the arrows, you can find some refuge by reading the new biography by Alice Schroeder, “The Snowball: Warren Buffett and the Business of Life” (published by Bantam on Sept. 29, the day Congress voted down the first bailout plan and the Dow fell almost 800 points). Although he is lucky in many ways, Mr. Buffett is also the world’s most successful investor because he has worked extraordinarily hard and thought very deeply about his craft.

Mr. Buffett gave Ms. Schroeder thousands of hours of face time, a privilege earlier biographers did not have. In 1995, Roger Loewenstein’s superb book “Buffett: The Making of an American Capitalist” analyzed Mr. Buffett’s rationale for specific investments in illuminating detail, but Ms. Schroeder has been able to delve more deeply into Mr. Buffett’s mind and heart.

The result is riveting and encyclopedic. At 960 pages and 3½ lbs., “The Snowball” hits readers like an avalanche. Some people feel almost buried by the wealth of detail about Mr. Buffett’s family life, but the overall power of the story carries “The Snowball” forward. There is much to be learned from it.

To me, the most striking thing to come out of the book is a clearer sense of Mr. Buffett’s extraordinary emotional detachment. Remember, this is an authorized biography; as Mr. Buffett’s spokesperson put it, “She [Ms. Schroeder] wrote every word, and he did not edit it.”

After years of emotional isolation from the workaholic Mr. Buffett, his wife Susie “stayed up late at night alone, listening to music that transported her to some different place…. She loved…great soul music, like the Temptations, who sang of a world in which it was men who felt all the longing.”

Passages like these are heartbreaking for even a stranger to read. How many of us could bear to let someone else bare our most intimate weaknesses and failures? And yet here we not only see the pain that Mr. Buffett caused his wife, but we know that he has acquiesced in letting us see it.
This detachment, I think, is one of Mr. Buffett’s greatest strengths. He has the ability to hover over his own actions and judgments, as if he were having an out-of-body experience, looking down and evaluating the man who made them as if he were someone else entirely.

In person, Mr. Buffett is as warm and empathetic a person as anyone I have ever met — but he also seems, in Ms. Schroeder’s telling, to be forever observing himself from a distance as well. There is, in her portrait of him, a streak of something at least mildly reminiscent of autism: a photographic memory, an effortless command of complex mental computations, an enduring obsession with collecting and measuring everything imaginable.

This almost-autistic streak in Mr. Buffett exacted a terrible toll on his family as he toiled around the clock for years. Long before it was common, he worked out of a home office, and it is hard to shake the image of him padding through the house in his stocking feet, his face buried in an annual report, oblivious to his own family.

Mr. Buffett’s unparalleled record of investing achievement came at a personal price most of us would never be willing to pay; although he now has a warm relationship with his adult children, his billions were earned only at an incalculable emotional cost in their earlier years.

I shuddered several times as I read Ms. Schroeder’s account of how desperate Mr. Buffett’s family was for his affection. Anyone who thinks beating the market is easy should think twice, based on Mr. Buffett’s own experience.

The Schroeder book makes it clear that in his early years, Mr. Buffett paid a toll so high, in currency so dear, that most investors would not dare to approach the same tollbooth.
Here are the investing ideas that I think the book highlights in new detail:

Discipline. What explains Mr. Buffett’s success? His one-word answer: “focus.” For him, that meant working all hours day and night, memorizing oceans of statistics about hundreds of stocks, and reading corporate financial statements on a family trip to Mr. Buffett’s uncanny ability to stay one step ahead of the markets comes from five decades of working harder on his homework than anyone else. Can you even name the three toughest competitors of every company whose stock you own?

Self-confidence. From his father, an iconoclastic politician, Mr. Buffett inherited what he calls the knack of keeping an “inner scorecard,” rather than an “outer scorecard.” He does not care whether other people agree with him. He cares only whether his decisions make sense to him, based on his own rigorous research. Do you invest based on what “everybody knows” is “true,” or do you analyze all the evidence yourself?

Self-control. Mr. Buffett does not let the emotions of millions of strangers — the collective greed and fear of the markets — determine his own mood. When he feels his blood pressure rising or his nerves on edge, he calms himself down by gazing at snapshots of his kids or playing a game of bridge with his friends. Mr. Buffett restores his sense of self-control by refusing to dwell on the things he cannot control. Are you staring at every scarlet downtick on the Dow?

Inversion. Mr. Buffett most likes to buy stocks not when they are going up, but when they are going down. In 1969, during a raging bull market, he shut down his original investment partnership. Then, in 1974, when stocks (and market sentiment) hit rock bottom, Mr. Buffett bought with such abandon that he felt “like an oversexed guy in a harem.” Again, in 1999, as investors went gaga for technology stocks, Mr. Buffett sat on his hands. In the miserable market of 2008, he is buying again (although sometimes on “sweetheart” terms not available to you and me). Are you tempted to stand aside from stocks until after they go up?

The long view. From a very young age, Mr. Buffett developed the remarkable habit of regarding a dollar spent today as a small fortune he would not have in the future: “Do I really want to spend $300,000 for this haircut?” He felt that any money he could not invest was money that would never grow — and that he would thus incur a huge future price for any present spending. If you are among the many people cutting back your 401(k) contributions because the market has cratered, have you thought about the cumulative future costs of that decision?

Rigid versatility. Throughout his career, Mr. Buffett has been tactically flexible but strategically inflexible. His core principles have never varied one iota: Buy only what he understands, never overpay, always put safety first, be patient. But Mr. Buffett is as stretchy as Plastic Man when it comes to implementation. He will buy silver ingots, or municipal bonds, or a privately held company that manufactures both bricks and cowboy boots — whatever is on sale at the right terms. Now that virtually every investment on earth is down between 10% and 60%, is cash the only thing that interests you?

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The Warren Buffett Way: : Fixed-Income Marketable Securities

Warren Buffett is perhaps best known for his stock picking success. However, he also buys fixed-income securities. With fixed-income investments, Buffett selects between short term cash equivalents, medium-term fixed-income securities, long-term fixed-income securities and arbitrage plays. Buffett doesn't have a strong preference for which of these categories to invest in, he simply considers which investment will return the highest after-tax return and invests accordingly.

In general, Buffett considers bonds to be mediocre investments. Buffett understands that in an inflationary scenario, the purchasing power of money declines. With confidence on the stability of a currency, Buffett would become more interested in bonds. Buffett also views bonds from a "business-persons perspective". Most fixed-income returns are set below the returns that Buffett expects as a businessperson.

Buffett knows that the long-term average return on equity for American businesses is 12 percent. If an investment was made in a business that reliably earned 12 percent on equity and the company retained all of its earnings, an initial $10 million investment would be worth $300 million in 30 years. Therefore, in order to earn a businesslike return from a yield paying bond, the bond would have to pay a 12% yield and all coupons paid out would also need to be reinvested at 12%. Comparing the expected returns on investments between bonds and businesses is prudent in making a choice on where to invest.

Its noteworthy that Berkshire has historically held a much smaller percentage of fixed-income securities compared to other insurance companies. In 1993, Berkshire held only 17% of their investment portfolio in fixed-income securities compared to the 60%-80% that most of their insurance peers held in fixed-income securities

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Warren Buffett Buys Eaton Corp., ConocoPhillips, U.S. Bancorp., NRG Energy Inc., Sells Bank of America Corp.

The long awaited Warren Buffett portfolio is out today after the market close. Berkshire has a new position Eaton Corp., and adds to ConocoPhillips (COP), as GuruFocus has anticipated. These are the details of the buys and sells during the third quarter.

Warren Buffett buys Eaton Corp. during the 3-months ended 09/30/2008, according to the most recent filings of his investment company, Berkshire Hathaway. Warren Buffett owns 40 stocks with a total value of $69.9 billion. These are the details of the buys and sells.

New Purchases: ETN,
Added Positions: COP, NRG, USB,
Reduced Positions: BAC, WTM,

For the details of Warren Buffett's stock buys and sells, go to http://www.gurufocus.com/StockBuy.php?GuruName=Warren+Buffett

Added: ConocoPhillips (COP)
Warren Buffett added to his holdings in ConocoPhillips by 40.66%. His purchase prices were between $72.74 and $90.46, with an estimated average price of $80.2. The impact to his portfolio due to this purchase was 2.54%. His holdings were 83,955,800 shares as of 09/30/2008.

ConocoPhillips is a major international integrated energy company with operations in some 49 countries. ConocoPhillips has a market cap of $70.65 billion; its shares were traded at around $49.18 with a P/E ratio of 3.89 and P/S ratio of 0.31. The dividend yield of ConocoPhillips stocks is 3.61%.

Added: U.S. Bancorp (USB)
Warren Buffett added to his holdings in U.S. Bancorp by 6.27%. His purchase prices were between $25.43 and $37.53, with an estimated average price of $31.1. The impact to his portfolio due to this purchase was 0.22%. His holdings were 72,937,126 shares as of 09/30/2008.

U.S. Bancorp is a financial services holding company. They operate full-service branch offices and ATMs and provides a comprehensive line of banking brokerage insurance investment mortgage trust and payment services products to consumers businesses and institutions. U.S. Bancorp is the parent company of Firstar Bank and U.S. Bank. U.S. Bancorp has a market cap of $46.15 billion; its shares were traded at around $27.38 with a P/E ratio of 13.20 and P/S ratio of 4.06. The dividend yield of U.S. Bancorp stocks is 5.7%.

Added: NRG Energy Inc. (NRG)
Warren Buffett added to his holdings in NRG Energy Inc. by 54.41%. His purchase prices were between $26.41 and $41.97, with an estimated average price of $35.5. The impact to his portfolio due to this purchase was 0.06%. His holdings were 5,000,000 shares as of 09/30/2008.

NRG Energy Inc owns and operates a diverse portfolio of power-generating facilities primarily in the United States. Its operations include baseload intermediate peaking and cogeneration facilities thermal energy production and energy resource recovery facilities. NRG Energy Inc. has a market cap of $5.28 billion; its shares were traded at around $23.85 with a P/E ratio of 6.00 and P/S ratio of 0.83.

New Purchase: Eaton Corp. (ETN)
Warren Buffett initiated holdings in Eaton Corp.. His purchase prices were between $57.41 and $81.71, with an estimated average price of $71.1. The impact to his portfolio due to this purchase was 0.23%. His holdings were 2,908,700 shares as of 09/30/2008.
Eaton Corporation is a global diversified industrial manufacturer. Eaton is one of the leaders in fluid power systems electrical power quality and controls automotive air management and fuel economy and intelligent truck components for fuel economy and safety. Eaton Corp. has a market cap of $6.79 billion; its shares were traded at around $42.58 with a P/E ratio of 5.66 and P/S ratio of 0.46. The dividend yield of Eaton Corp. stocks is 4.45%.

Reduced: Bank of America Corp. (BAC)
Warren Buffett reduced to his holdings in Bank of America Corp. by 45.05%. His sale prices were between $21.24 and $37.48, with an estimated average price of $30.3. The impact to his portfolio due to this sale was -0.11%. Warren Buffett still held 5,000,000 shares as of 09/30/2008.

Bank of America Corp. is one of the world's leading financial services companies. Bank of America provides individuals small businesses and commercial corporate and institutional clients across the United States and around the world new and better ways to manage their financial lives. The company enables customers to do their banking and investing whenever wherever and however they choose. Bank of America Corp. has a market cap of $82.39 billion; its shares were traded at around $17.1 with a P/E ratio of 14.28 and P/S ratio of 1.80. The dividend yield of Bank of America Corp. stocks is 10.59%.

Reduced: White Mountains Insurance Group Ltd. (WTM)
Warren Buffett reduced to his holdings in White Mountains Insurance Group Ltd. by . The impact to his portfolio due to this sale was 0.97%. Warren Buffett still held 89,279 shares as of 09/30/2008.

White Mountains Insurance Group Ltd. is engaged in the business of property and casualty insurance and reinsurance. White Mountains Insurance Group Ltd. has a market cap of $3.33 billion; its shares were traded at around $348 with P/S ratio of 0.96. The dividend yield of White Mountains Insurance Group Ltd. stocks is 2.32%.


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Buffett's Berkshire Boosts Stake in ConocoPhillips

Warren Buffett's Berkshire Hathaway Inc. increased holdings in oil producer ConocoPhillips and took a stake in manufacturer Eaton Corp. in the third quarter, expanding the firm's portfolio as markets tumbled.

Berkshire had more than 83 million shares in Houston-based ConocoPhillips as of Sept. 30, compared with about 17.5 million on March 31, the company said today in a regulatory filing. Buffett also disclosed a reduced holding in Bank of America Corp. and more shares of NRG Energy Inc., the second-biggest power producer in Texas. The Standard & Poor's 500 Index dropped 8.9 percent in the three months ended Sept. 30.

Berkshire, which purchased MidAmerican Energy Holdings in 2000 and reported record profits last year from selling holdings of PetroChina Co., is betting on a long-term increase in energy demand worldwide. Global oil consumption will average 85.89 million barrels a day this year, up 80,000 barrels from 2007, according to a U.S. Energy Department report this week.

``Buffett is thinking decades ahead,'' said Jeff Matthews, author of ``Pilgrimage to Warren Buffett's Omaha'' and founder of Greenwich, Connecticut-based hedge fund Ram Partners LP. ``He's thinking about oil production falling and an eventual doubling of worldwide demand as countries like China reach U.S. levels.''

ConocoPhillips traded as low as $67.31 a share in the third quarter after closing 2007 at $88.30. The company dropped 3.6 percent today to $47.39 in New York Stock Exchange composite trading before Berkshire's filing.

Waiting for Spring

Buffett, the world's preeminent stock picker, has said he's also spending his own money to buy U.S. stocks as prices decline amid the worst financial crisis in 75 years, switching his holdings from government bonds. Berkshire, where Buffett is chief executive officer and head of investing, spent about $3.94 billion on stocks in the quarter and sold shares for about $300 million, according to separate filings.

``Most major companies will be setting new profit records 5, 10 and 20 years from now,'' Buffett said in a column in the New York Times in October. ``If you wait for the robins, spring will be over.''

Berkshire held about 59.7 million ConocoPhillips shares as of June 30, Buffett revealed in a filing. Buffett, 78, won permission from regulators to keep that number confidential until today to prevent copycat investing. Buffett's company is now the largest shareholder in ConocoPhillips.

Looking for Stability

``Energy is an industry that has the stability that he's looking for,'' said Michael Yoshikami, the president of YCMNet Advisors in Walnut Creek, California, which manages $850 million, including Berkshire shares. ``Conoco is a huge refiner, and while refiners are certainly under some pressure, they are essentially a service-for-fee business, so they are a classic kind of stable, core business for his portfolio.''

Bill Tanner, a spokesman for ConocoPhillips, had no immediate comment.

Berkshire is also the largest shareholder of companies including Coca-Cola Co. and American Express Co. as of Sept. 30, with a portfolio worth $76 billion. Berkshire has been increasing investments in the past year in banks, including U.S. Bancorp and drugmakers such as France's Sanofi-Aventis SA.

Buffett, named America's richest man by Forbes magazine, built Berkshire from a failing textile manufacturer into a $155 billion holding company by investing premiums from insurance subsidiaries such as Geico Corp. in out-of-favor securities and buying businesses whose management he deemed superior.

`Inner Workings'

Known as the ``Oracle of Omaha,'' Buffett has become a cult figure among investors, drawing 31,000 people to an Omaha arena for his annual shareholders meeting this year.

Mutual funds and individual investors mimic his stock picks in an effort to duplicate his success, and an academic study in 2007 found that using this strategy for 31 years would have delivered annualized returns of about 25 percent, double the return of the S&P 500.

``Once every three months we get a glimpse into the inner workings of the mind of the greatest investor in the history of mankind,'' said Mohnish Pabrai, founder of Irvine, California- based Pabrai Investment Funds, who holds Berkshire shares. ``Equities are the cheapest we've seen them in a very long time.''

Buffett discloses other holdings in filings with non-U.S. regulators.

Goldman Sachs

Buffett is finding other opportunities amid the economic turmoil, funding buyouts, buying preferred shares and acquiring whole companies. In the past two months, he agreed to spend $5 billion of Berkshire's cash for a stake in Goldman Sachs Group Inc., betting the Wall Street firm would be among the survivors of a worldwide credit crisis, and another $5 billion in preferred shares of General Electric Co.

He also agreed in July to lend $3 billion to Dow Chemical Co. to help fund that firm's takeover of Rohm & Haas Co., and committed $6.5 billion in April to help Mars Inc. buy chewing gum maker Wm. Wrigley Jr. Co. Berkshire's MidAmerican Energy Holdings Co. struck a deal in September to pay $4.7 billion for Constellation Energy Group Inc.

``When there are market dislocations we're always going to take advantage of them,'' Buffett told reporters at Berkshire's annual shareholder meeting in May. Deals and investments reduced Berkshire's cash holdings to $33.4 billion on Sept. 30 from $47.1 billion a year earlier, according to a regulatory filing last week.

Berkshire shares, which rose in 17 of the last 20 years, are down about 29 percent since Dec. 31. The firm has reported profit declines for four straight quarters, the longest streak in more than a decade, as insurance results worsened.

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What's Buffett Buying? Berkshire's Portfolio Snapshot Coming Later Today

Warren Buffett's Berkshire Hathaway is expected to file its quarterly portfolio snapshot with the SEC after today's (Friday's) closing bell on Wall Street. The report of Berkshire's publicly-traded U.S. stock holdings as of the end of the third quarter, September 30, could reveal whether Buffett has been buying U.S. stocks for Berkshire as enthusiastically as he has been buying for his own personal account.

There is, however, the matter of timing. Today's filing won't include any information about October. Buffett's "I'm Buying American" op-ed in the New York Times was published on October 17. The benchmark S&P 500 stock index had dropped about 18 percent from its September 30 close by then, presumably creating some of the bargains Buffett was picking up in early October. We'll have to wait until mid-February's fourth quarter filing to get some clues about last month. Three months ago, we learned that Berkshire has added a new stake in NRG Energy

While we're waiting for today's filing, check out Berkshire's holdings as of June 30 with our Portfolio Tracker. It shows you what stocks Berkshire has reported owning, how many shares and the real-time dollar value of the holdings. We've also just added another column that displays the percentage of each company's outstanding shares that are owned by Buffett & Co. And, of course, it will be updated later tonight with the latest holdings as revealed in today's filing.


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Warren Buffett makes Berkshire Hathaway proud

Warren Buffett is in the news these days after publicly expressing his confidence in the future of American corporations and recently investing $8 billion to purchase interests in GE and Goldman Sachs. With the recent stock market turmoil, many look to the world’s wealthiest man for guidance, and rightly so. Buffett is widely recognised as an exceptional judge of corporate value. “The Oracle of Omaha,” as he is known, is arguably the most successful investor in history. Corporate leaders regularly make the trek to Omaha, Nebraska, seeking his wisdom. With so much attention on Buffett’s investment acumen, it’s easy to overlook another talent: motivating people. It’s one of a host of reasons his investments tend to outperform the market.

The talented managers who run Buffett’s companies remain with him because he keeps them engaged in their jobs. In Buffett’s own words, “Charlie [Charlie Munger, Buffett’s longtime business partner] and I mainly attend to capital allocation and the care and feeding of our key managers . . . Most of our managers are independently wealthy and it’s up to us to create a climate that encourages them to choose working with Berkshire over golfing or fishing.”

A closer look at Buffett shows, at least in part, how he does it. He imparts an inspiring identity to members of the Berkshire Hathaway family. The vision he constantly communicates is that Berkshire companies are well managed and have great people. It’s not unusual to hear him tell employees to “just keep on doing what you’re doing . . . we’re never going to tell a .400 hitter to change his batting stance.” Who wouldn’t be flattered to be praised by Buffett?

Buffett shows that he values people in several ways. He is trusting and forgiving. By investing for long periods in the companies he owns, Buffett indicates that he trusts his managers. He delegates decision-making authority, in his own words, “to the point of abdication.” And when a manager makes an honest mistake, he keeps it in perspective. One manager who informed Buffett that his business had to write off $350 million was stunned when Buffett told him, “We all make mistakes . . . if you don’t make mistakes, you can’t make decisions ...You can’t dwell on them.”

Buffett models civility and respect for others. His secretary has said she hasn’t seen him mad even once in the nine years she has worked for him. The one time I met Buffett at a meeting in New York City, he patiently waited around to speak with everyone who wanted to meet him. He was attentive and focused on them, never projecting the slightest hint of self-importance.

He is confident, yet humble. Buffett knows he’s very good at what he does, and he projects an easy confidence rather than superiority or arrogance.He credits his managers for his success, remains plain spoken, works in a modest office, lives in a modest house, and proclaims thrift as a virtue (the vanity plate on his former car read “Thrifty”).

Compare Warren Buffett to Donald Trump, for example. It’s hard to imagine Buffett prominently displaying his name all over everything he owns or relishing in telling someone “you’re fired.” Instead of everything being all about him, Buffett insists it’s all about others. He appears to be guided by ‘The Golden Rule’ rather than Machiavelli’s The Prince.

Given the way Buffett treats people, it should come as no surprise that some private company owners report turning down more lucrative offers to join the Berkshire family. It is telling, that no manager who sold a company to Buffett has ever left for a competitor, and several continue to work well into their eighties. Put simply, “people want to work for him,” proclaimed another satisfied manager, Rich Santulli, head of NetJets.

Buffett promotes communication by being approachable and candid. At the annual meeting he hosts in Omaha for Berkshire shareholders, Buffett and Munger sit on a platform, listening to shareholder opinions and answering questions for hours on end. In dealing with his managers he follows the data they provide him in periodic reports and makes himself available if they want to talk. Buffett writes and speaks with candour, even pointing out mistakes he made and what he learned from them.

Warren Buffett’s ways make the managers of Berkshire Hathaway feel proud to be affiliated with the company, feel valued as human beings and feel they can communicate openly and honestly with Buffett. These feelings (or emotions) make people want to give their best effort in their work and make them more energetic, optimistic, trusting and co-operative.

Warren Buffett’s behaviour reflects common sense and yet, studies have shown that such behaviour is uncommon in practice among those with power in organisations. They are yet another reason why Buffett deserves to be called the Oracle of Omaha.

(Michael Lee Stallard is president of E Pluribus Partners, a leadership training and development organisation.)

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Berkshire Hathaway Bounces Back From 7% Plunge To Avoid Closing Below $100,000

Berkshire Hathaway shares traded below $100,000 for the first time in over two years today, but they did not close in five-digit territory.

At their lowest today (Thursday) just about three hours before the closing bell, Berkshire shares hit $96,050, a drop of 7.05% on the day.

The stock then rallied along with the rest of the market, closing at $102,800. Berkshire hasn't closed below $100,000 since October 20, 2006.

While Berkshire avoided that distinction today, its loss of $533 (0.52%) does bring it to a fresh two-year closing low.

The stock is down 31.1 percent from its all-time closing high of $149,200 last December.
Berkshire's downdraft, and a weak earnings report for the third quarter, are prompting some talk that Warren Buffett has lost his touch. CNBC's David Faber reported yesterday that some investors are shorting Berkshire in the wake of Friday's quarterly results.

Investor Doug Kass had been short Berkshire for most of the year, before covering that position at a profit in August. Now he has a new summary of what he sees as Buffett's mistakes over the past few years in a post on TheStreet.com headlined Warren Buffett Has Lost His Groove. And what about the argument that Buffett invests for the long term, making short-term setbacks unimportant? Kass writes, "Buffett's notion of long term is now becoming a convenient shroud to poorly timed investments."

"Is the notion of long term now irrelevant, particularly given Warren Buffett's age and the likelihood that sooner than later he will be succeeded by one or several new individuals at Berkshire's helm? Is it irrelevant ... in a possible multiyear bear market or in an economy that faces headwinds we haven't seen in decades? Or is it just one of those tautologies that it is safe to buy in the long term?"

Yes, Buffett has been counted out before. But this time, Kass contends, it's different.

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From WARREN E. BUFFETT

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

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Warren Buffett: Lost His Touch (Again)?

Various people are wandering about saying that investor Warren Buffett has lost his touch. The gist of the argument: A combination of style drift (derivatives?!), ill-timed investments, and his "long term" refrain on declining positions demonstrate that he is, at the very least, having a hard time right now, if not outright floundering, at least a little.

Doug Kass argues this in a morning post over at RealMoney. As he would concede, this isn't the first time Warren has been deemed ready for pasture, what with similar arguments having been made in 1999, which turned out to be premature.

Is this time different? Kass argues "Yes", with the Buffett no longer having as long a long term as he once did, and with his style drift particularly worrisome in the face of some ill-timed investments.

I’ve been arguing for some time that Buffett is feeling more pain than most people realize, but I’m also not convinced he has lost his touch either. Maybe it's time to open this conversation up. Other thoughts?

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How to spot Multibagger Stocks?

"IF you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them." -- Peter Lynch.

Easier said than done? You can make it 'easier done than said'!

Here's how:

1. Keep your eyes and ears open.
A simple way to identify potential multi-baggers is to look around for emerging sectors and new trends and invest in the leading companies participating in these trends.

For instance, some of the mega sectors (organized retail, media, telecommunications, real estate etc.) helped to create wealth for many investors who participated in those sectors in the early phase of discovery. Let’s take the example of two mega sectors - telecommunications and organized retail. If you had invested in Bharti Enterprises during their IPO in 2002 or in Pantaloon Retail when you saw their first 'Big Bazaar' store, you would have grown your investment by 18 times in Bharti and by 65 times in Pantaloon!

2. Go out, explore and see 'what's in'
Peter Lynch used to spend some weekend time for going to malls and shopping with his daughters. According to him, this was a great place to spot new stock stories and do some real market / business research. He’s found amazing stock ideas by simple observations like the favourite toy store with kids, the restaurant people frequent the most, fashion trends with teens etc. Once he would get these answers, he would research the underlying companies and find out if they were attractive investment opportunities.

This might seem like a far too easy but difficult to implement strategy but trust me, it can work. See what products are in demand, what things get picked up from shelves in super markets the fastest and so on. It might give you good insights on stock picking.

3.You can beat fund managers!
Did you know that almost 85 per cent of professional fund managers fail to beat the benchmark index at most times. Normally, fund managers have many restrictions in the kind of companies they can invest in terms of market capitalization, liquidity etc. Mostly, companies that are a part of emerging sectors are small caps or mid caps and hence, outside the radar of most fund houses.

You can do better than them by using your common sense and basic research skills. Also, investing early in the company's cycle offers you the most attractive entry price for the stock by default.

Since India is catching up with the developed world, it is one of the best markets to discover new (stock) success stories. Maybe, the next bull run will be lead by companies in healthcare, niche infrastructure, hospitality, specialty retail, entertainment, security solutions, tourism etc.

So, the next time you step outside your home, don't forget to see which is the most popular car on the road. And by the way, what brand of toothpaste do you use? This is important, since the next multibagger might be right in your home!

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AmEx Taps the TARP; Not the Same AmEx Buffett Bought

The investing thesis behind American Express (AXP) has always been that it has a higher quality of user and thus its defaults will be lower than the typical credit card issuer. Unlike Visa (V) and Mastercard (MA) who issue their cards through banks and collect a "toll" each time the card is used, Amex holds the credit balances and is essentially its own bank. This has enabled Amex in good times to earn a high return on equity as it collects the interest payments that go to the banks from the other card issuers.

All that seems to have changed. It seems, being hit by slowing consumer spending and rising defaults, AmEx is seeking roughly $3.5 billion from the TARP program.

It isn't clear if the application under the Troubled Asset Relief Program [TARP] came before or after AmEx got Federal Reserve approval Monday to become a bank-holding company.Why? Even the most affluent AmEx customers are cutting back on discretionary purchases, the company has acknowledged. A spending slowdown is particularly problematic for AmEx because its business model revolves around consumers who pull out plastic for their purchases.

That alone would not cause the problem. What would? Delinquencies and defaults on credit cards are rising. Meanwhile, the company is virtually locked out of credit markets because investors who buy consumer loans are sitting on the sidelines. All this is causing a liquidity problem. Again, like other institutions, not a solvency issue, but a liquidity one. It is also the reason we are hearing stories about AmEx card holders with no credit problems getting credit limits decreased. AmEx is trying to decrease its liabilities.

Not good news for shareholders for two reasons. The decrease in consumer spending reduces the "toll" AmEx gets when a customer uses his card. The credit limit decreases the company is placing on customers now further reduces that effect and reduces interest AmEx wil earn on outstanding balances. When you add this to the increasing defaults, you have a trouble stew.

This is not the "salad oil" fiasco that hit AmEx when Berkshire's (BRK.A) Warren Buffett bought a huge chunk of the company in the late 1970s. This is a fundamental change to the company's structure and the way it does business. The AmEx model back then was to essentially "front" customers money who would then pay it back a month later in full. Now Amex extends payment terms on almost all cards and has branched out into business lending. Now more than ever it is exposed to the consumer and his or her credit condition, not just their current spending patterns.

Previously if you did not pay your AmEx bill each month it was shut off. Now, consumers can continue to rack up debt to their limits while making minimum payments until they are tapped out. In this case, the monetary default risk for AmEx is far higher. This is causing increasing credit losses for AmEx.

The old thought that "AmEx is less sensitive to a recession" has never really been tested. The last real recession we had in the US was the 1990 one (the 2000 "recession" was a pothole). AmEx then was not nearly as exposed to the consumers' credit condition as it is now. Only now are we going to be able to test the thesis. Based on early results, it was wrong.It also means the old investing thesis needs to be rethought as it has now become less valid.

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Keep watch for Buffett's stock holding disclosure (BRK-A)

Berkshire Hathaway Inc. (NYSE: BRKA) was big news last week as third quarter profit fell 77% on difficulties in the insurance business. In the wake of the news, Berkshire shares have hit 52-week lows (technically the 52-week lows is $3,000 per share, but this was a strange intraday trading anomaly that was soon corrected).

For those investors that do not hold Berkshire shares but still maintain a fascination with the “Oracle of Omaha,” Warren Buffett, the real news was not last week but will be coming at the end of this one when his end of quarter stock holdings are made public. Thanks to the size of Berkshire’s investments, the company is required to file a 13F with the SEC detailing its security holdings. Buffett made headlines with his stock cheerleading in the New York Times in October, but it will be time to see if he put his money where his mouth was.

Granted, Buffett did make big moves into General Electric (NYSE: GE) and Goldman Sachs (NYSE: GS), but the terms were so distorted – preferred shares with favorable dividends and the option to buy more shares later at attractive pricing – that it was meaningless commentary on the market for the average investor.

It never hurts to pay attention to a man that has generated 25% annual returns for 30 years.

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Should You Still Believe in Buffett?

On a day when the Dow lost another 400 points or so, when Citigroup touched below $10 a share, GE is below $16 and Goldman is down another 9 percent, one major investor points out that the Oracle of Omaha's investment strategy has disappointed even his staunchest supporters.

No, Warren Buffett is not tied to Citi, but he is closely tied to GE and Goldman. This investor, it should be noted, is also one of Buffett's biggest fans. All praise for the man aside, his picks and his returns have seen better days. Buffett's Berkshire Hathaway has suffered major losses this year. The company recently reported a 77 percent drop in third-quarter net income, largely attributed to more than $1 billion on unrealized derivative losses and paid hurricane claims following hurricanes Gustav and Ike.

As for Buffet's own individual bets, well, they haven't paid off, either ... yet. Buffett invested a combined $8 billion in General Electric and Goldman Sachs, on terms only someone like Warren Buffett could pull off. They have yet to break even. Goldman's stock price since Buffett invested has gone from $125 to $75, and chatter, speculation and, yes, rumors on the street about GE's woes would make even the most bullish of investors think twice.

To his credit, Buffett has lived up to his nickname of "sage" during the current financial crisis. His voice, his rhetoric, his humor and his easy-to-understand logic have together made a welcome and reassuring voice for everyone from President-elect Barack Obama to the average man on the street. He's the toughest man to get an interview with these days, and his every word can move a stock. He's said this is the worst financial crisis he's seen in a long time, if ever.

So you can look at it from three different points of view. One, no one is perfect, and even the smartest investor in the world makes mistakes. Two, when he says he's a long-term investor, he really means LONG TERM. Or three, today's Buffett is more of a symbolic and iconic figure than a master stock picker. Buffett fans probably hope the second point of view is the right one, and while they'll likely accept the first one, I doubt they're ready to accept the third.

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Buffett, Ross insurers eye Dexia U.S. unit

The insurance businesses of billionaire investors Warren Buffett and Wilbur Ross are close to buying all or part of the U.S. bond insurance unit of Dexia Belgian business daily De Tijd said on Tuesday.

"The transaction is in the final stages, according to several sources," the newspaper said on its website. Belgian-French financial services group Dexia, which received a 6.4 billion euro ($8.3 billion) bailout from the French, Belgian and Luxembourg governments in September, has said it will present the results of a strategic review on Friday.

This could include a decision on the fate of Financial Security Assurance (FSA), the U.S. bond insurance arm that made a first-half net loss of $752 million and whose triple A credit rating is under threat. Dexia's board charged new Chief Executive Pierre Mariani with exploring options to reduce the risk associated with FSA's activities and had said he should do so by this Friday, when Dexia also presents its third-quarter results.

Reacting to what it called "rumors" that it would consider selling all or part of FSA, Dexia confirmed Mariani was looking at options for the unit and that the group would communicate further in due course.

Dexia, which has provided FSA with a $5 billion unsecured standby credit line, decided in August that FSA would exit the risky asset-backed securities market and focus on guaranteeing municipal bonds, though it still has a portfolio of riskier assets.

De Tijd said insurers Berkshire Hathaway Assurance and Assured Guaranty were particularly interested in the "healthy" part of FSA -- guaranteeing municipal bonds -- but there were also talks about its riskier activities.

The latter might be placed in a separate holding, De Tijd said. Buffett started Berkshire Hathaway Assurance at the start of this year, while Ross is a large shareholder in Assured Guaranty. WL Ross & Co holds 13.4 percent of Assured and agreed in September to buy up to 5 million additional shares, which would bring its holding up to 18.9 percent.


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